Terra Inc. is considering two production methods. The price of its product is $30 per unit. Method 1 has annual fixed costs of $120,000 and variable cost per unit of $18. Method 2 only has annual fixed costs of $10,000 but the variable cost per unit is $25.

a) Calculate the EBIT of the two methods if sales quantity is 10,000 units, 15,000 units and 20,000 units.

b) What is the breakeven quantity of the two methods (the sales quantity that they have the same EBIT)?

c) Assume sales quantity is 20,000 units. Calculate the DOL of the two methods.

Assume Terra selects method 1 and sales quantity is 20,000 units per year forever. The tax rate is 30%. Terra has $240,000 perpetual debts which pay annual coupon of 10%. It also has 50,000 common shares outstanding. Terra is planning to borrow additional $60,000 debt to buy back 10,000 shares,

d) Calculate the EPS of the current capital structure and the proposed structure.

e) What is the breakeven EBIT of the current and proposed capital structures?

f) Calculate the DFL of the two capital structures.